The Dumb Money creed rested on four pillars: perpetually low interest rates, perpetually rising asset prices (especially for housing), borrowers of all types remaining perpetually current, and perpetually strong markets for debt. The high priests of this cult were the nation’s central bankers. In the Era of Cheap Money (the fall of 2001 through June 2004), Fed Chairman Alan Greenspan convinced us that we could have low interest rates despite inflationary pressures and global growth. His successor, Ben Bernanke, in 2002 began trying to convince us that we might have as much to fear from deflation as from inflation.

Bernanke also provided intellectual fortification for the argument that one of our greatest vices—a tendency to debt-financed consumption—was actually something of a virtue. He helped popularize the concept of a savings glut, arguing that America’s twin budget and trade deficits could be traced not to a dearth of American savings but to a glut of foreign savings…. Economists claimed that the government measures of income used to calculate savings—which includes wages and salaries, interest on bonds, and stock dividends but which excluded capital gains on stocks, profits from selling a house, or withdrawals from 401(k) plans—were hopelessly behind the times. “The structure of the household portfolio has changed over time,” said David Malpass, chief economist at Bear Stearns, one of the leading exponents of what might be dubbed the theory of Magical Market Savings. In 2004, Malpass found that, thanks to the booming stock and housing markets, the net worth of U.S. households—their assets minus their liabilities—stood at a record $48.54 trillion, up 9.6 percent from 2003 despite sluggish income growth. Why put money aside for a rainy day when your house and the market were doing it for you?